Page 263 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes Another remedy available to an allottee of shares is to file a suit for damage in case the prospectus
does not include the matters required to be included in accordance with the provisions of the
Act.
Remedies against expert. The allottee to the shares who has been induced to take shares on the
faith of an untrue statement of an expert in the prospectus is entitled to claim from the expert: (i)
damages, (ii) compensation under s.62.
An expert is liable in damages in respect of his own untrue statement, wrong report or valuation
made by him and contained in the prospectus and the same principles apply as in the case of a
fraudulent or an innocent statement made by the directors. An expert is also liable to pay
compensation under s.62. However, he shall not be liable if he proves: (i) that having given his
consent, he withdrew it in writing before delivery of a copy of the prospectus for registration; or
(ii) that after delivery of prospectus for registration and before allotment, he became aware of
the untrue statement, withdrew his consent in writing and gave reasonable public notice of the
withdrawal and his reasons; or (iii) that he was competent to make the statement and believed
on reasonable grounds that it was true.
Liability under s.56. An omission from a prospectus of a matter required to be stated under s.56
(i.e., as per Sch. II) may give rise to an action for damages at the instance of a subscriber for
shares, who has suffered loss thereby, even if the omission does not make the prospectus false or
misleading. But, the plaintiff must prove that he has sustained damage by reason of the omission
of a matter required to be stated in the prospectus. A director or other person sued under s.56
may escape liability if he proves: (a) that he had no knowledge of the matter not disclosed; or
(b) that the contravention arose out of an honest mistake of fact; or (c) in the opinion of the court,
non compliance or contravention was not material or that the person sued ought reasonably to
be excused, having regard to all the circumstances of the case.

11.2.3 Criminal Liability for Misstatement in Prospectus (S.63)

Where a prospectus contains an untrue statement, every person authorizing its issue is punishable:
(i) with imprisonment for a term up to two years or (ii) with fine up to ` 50,000, or (iii) with both
imprisonment and fine. However, an expert is not criminally liable in respect of misstatements
in the prospectus.
Liability under s.68. Section 68 provides that any person who, either knowingly or recklessly
makes any statement, promise or forecast which is false, deceptive or misleading, or by any
dishonest concealment of material facts, induces or attempts to induce another person to enter
into or to offer to enter into any agreement for, or with a view to acquiring, disposing of,
subscribing for, underwriting shares or debentures shall be punishable with imprisonment for
a term which may extend to 5 years or with fine which may extend to ` one lakh or with both.

11.2.4 Golden Rule for Framing of Prospectus

The ‘Golden Rule’ for framing of a prospectus is:
Those who issue a prospectus hold out to the public great advantages which will accrue to the
persons who will take shares in the proposed undertaking. Public is invited to take shares on the
faith of the representation contained in the prospectus. The public is at the mercy of company
promoters. Everything must, therefore, be stated with strict and scrupulous accuracy. Nothing
should be stated as fact which is not so and no fact should be omitted the existence of which
might in any degree affect the nature or quality of the principles and advantages which the
prospectus holds out as inducement to take shares. In a word, the true nature of the company’s
venture should be disclosed.

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